GOLDBUGS have every reason to feel a little smug. On the back-foot since April – when gold suffered its worst one-day crash in 30 years – their faith in "the yellow metal" seemed vindicated by this week's stock market rout. As the giddy Nikkei plunged seven per cent, prodigal investors led astray by more exotic investments rushed back to gold's safe embrace. Perhaps it hasn't lost its haven status after all.
That had certainly seemed the case when, after a parabolic run that saw the value leap an extraordinary 500 per cent in a decade, the price started stuttering last year amid pronouncements, from SocGen and others, that "the end of the gold era is nigh".
What changed? Broadly, a sense that apocalypse had been averted. Having lost its status as end-of-the-world insurance, gold was just another unwanted metal, as vulnerable as any other to the slowing Chinese growth story. The Armageddon trade was over.
Gold has always run on long cycles. But history suggests that, when sentiment changes, the price can move rapidly: it almost halved, for instance, in 1975-76. And the recent surge of "paper gold" speculation – fuelled by the lorry-loads of cash heading into Exchange-Traded Funds (ETFs) – has exacerbated the threat of savage price swings.
According to ETF Trends, around 300 tons of bullion was sold in the first four months of the year. That's a lot of 400oz bars. Gold sceptics argue that if central banks in Europe are forced into a fire-sale to pay off their sovereign debts, we could see even more dramatic falls.
It's a strange thing gold, stirring up emotion like no other asset class. Its legend as a store of value makes it the favoured currency of everyone from German pensioners (haunted by the hyper-inflation of the 1920s), through Indian bridegrooms, to the far extremes of the US Tea Party movement.
Conspiracy theory and gold fanaticism go hand in hand. It was the CIA wot done it, was a common response on online forums following the April price crash.
But on other side of the fence, feelings run almost as high. "Rational" investors view gold as an infuriating relic of medieval finance, which doesn't yield anything, is expensive to store and is by no means as secure as people think.
Of course, the rationalists who wrote off gold in the 1990s ended up with a lot of egg on their faces. Chief among them, Gordon Brown – still flagellated for flogging off half the nation's reserves when gold was at a 20-year low below $300/oz (known for ever more as "Brown's bottom"). For him, there was the slow-burning torture of watching the price climb higher and higher until it reached a reputation-shredding $1,920/oz last year.
So, is gold really on a downward trajectory, and should you keep holding it? One reason for recent price falls is the belief that the splurge of central bank money-printing hasn't had the inflationary effect feared. If you think the jury's still out on that one, you'll probably want to hang on. The rule of thumb is to allocate between five and 15 per cent of your portfolio – it's up to you where on the fear gauge you place yourself.
Some reckon that gold miners are currently so unloved that they must be worth a speculative punt. But if you're holding gold as a safety play, I'd steer clear. Ditto ETFs. Armies of small investors appear to have concluded that the main reassurance of gold lies in its tangibility and portability.
A remarkable sub-plot of the falling gold price is that sales of precious metal coins have continued to do a roaring trade. Sovereigns (especially pretty Victorian ones) and Britannias make particularly good presents for children: as tangible tokens of how money and markets work. Wet the baby's head with one and, whatever happens to its value, you can later take the opportunity of boring the little nipper rigid with your educational theories of market psychologies and monetary values.
You might observe that, when it comes to gold, it's difficult to shake thousands of years of history, legend and tradition. Or that, pace Gordon Brown, there is never "an end to boom and bust". Which means that even when gold's down and completely lacking in lustre, it's never out. ·